IACI Q3: Lots of Jawboning, Little Progress

InterActiveCorp (IACI) Q3: Release

Key Points:

  • Overall: Not keeping pace with inflation. Revenue up 7% y/y, operating income before amortization up 2%, Adjusted EPS up 2%.  Q4 profit expected to be flattish year over year.
  • LendingTree (understandably) bombed: Revenue down 41% y/y, from $106mm to $63mm.  Operating income from +$15mm to -$6mm, even with a one-time gain.  Pains taken to assure everyone that LT not one of those other idiot mortgage originators we hear about every day, but still a big increase in loan-loss provision.
  • Media and Advertising, which includes Ask and “Fun Web Products” did well, but not as well as at first glance: Revenue up 40%, from $136 million to $190 million, an acceleration from last quarter.  Operating income before amortization up 74%, from $16 million to $28 million, but this was boosted by a change in R&D capitalisation (excluding this, margin declined).  This segment accounts for 16% of IAC’s OIBA.

Digital Details…

LendingTree: Revenue and operating income clobbered by fewer loans made, lower revenue per loan, fewer loans sold, and higher loan losses.  Those watching the Internet advertising market should note the reduction in marketing spending (Some nutcase analysts continue to argue that, as business gets worse, companies will spend more):

Revenue from all home loan products declined with home equity declining the fastest, driven by the overall mortgage market deterioration as well as the decline in real estate values. Profits were impacted by an $8.2 million provision for loan losses in the quarter, compared to $2.1 million in Q2 2007 and $0.7 million in Q3 2006. The Q3 2007 provision reflects the increased losses the company is experiencing with respect to loans sold. Profits were also impacted by higher costs per loan sold resulting from lower close rates and stricter underwriting criteria, partially offset by lower marketing expenses. Profits benefited by $13.3 million due to the net impact of a favourable legal settlement and an increase in certain legal reserves, offset by $6.6 million in restructuring costs.

Media and Advertising: Good revenue growth, but not driven by Ask.com property.  Instead, driven by growth in “syndicated search queries” (which are far lower margin than Ask.com search queries) and growth in “Fun Web Properties” (margin structure unknown).  Operating income before amortization grew faster than revenue, but only because of the capitalisation of $5.8 million of R&D costs.  Excluding this, OIBA grew 38%, slower than revenue (i.e., operating margin declined–probably due to a larger percentage of revenue coming from syndicated search).  Ask.com revenue did grow, but not clear how much.

Media & Advertising revenue growth was driven by an increase in queries from syndicated search and increased queries and revenue per query at Fun Web Products. Within IAC Search & Media, network revenue growth outpaced that of proprietary revenue, primarily due to a wider adoption of syndicated search and sponsored listings products. Proprietary revenue grew on the strength of Fun Web Products, while Ask.com revenue grew, due to an increase in revenue per query and queries. Operating Income Before Amortization benefited from a reduction in the current year expense of $5.8 million resulting from the capitalisation and amortization of costs related to the distribution of toolbars which began on April 1, 2007. These costs had previously been expensed as incurred.

Conference Call Notes
Growth rate not what we want.  But OK.
LendingTree: environment still crappy.  Positioning for break-even.  Marketing spending down 24%.
TicketMaster: margin still declining (operating cost increases), but op inc up 9%.  Expecting flat or up slightly in Q4.
Interval: Strong
Match: 11% increase in rev/sub.  Deferred some marketing.
Overall Q4: Expect profit flat with last year.

LendingTree: We are a lead-generator and correspondent mortgage originator–not like those idiots you hear about every day.  Increased loan loss provision, but  business model different than Countrywide.  We hold for no more than 30 days, don’t have investment portfolio.  Reducing costs.  New sales technology.  Increased prices.  Reduced marketing spend.

Ask/”Fun Web Products”: 
Zwinkie 10mm users.  Ask 3D received well.  Cites irrelevant consumer survey.  Now rebuilding/redeploying core search system.  (Nice, won’t help).  Ask Mobile continuing to rise. (No stats).  New ad campaign (thank goodness).  Helped queries late in Q3 and continues to do so in Q4.  We re-orged sales team, put serving on single platform.  We expect continued improved results.

Ask.com: Keep saying “pleased” with everything.  Not clear why.  “Expect to continue to grow share in queries.”  We have seen no growth in query share in Comscore etc, so not clear what this is based on (or whether they meant growth in queries).  No comment on Google negotiations.

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